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Balkan commentator Richard Cowper reports from Pristina on the world's newest country.

Richard Cowper is a foreign policy expert and worked for the Financial Times for 30 years .

Kosovo: world’s newest country faces daunting economic challenge

By Richard Cowper in Pristina

Kosovo, the former Serbian province, which announced its independence last month, is battling to establish its international credentials as the world’s newest nation. But it will not be politics alone that decrees the fate of one of the poorest countries in Europe.

“It’s the economy, stupid! That’s what will decide whether Kosovo is a success or yet another failed state,” says a top foreign official who has spent many years in the Balkans watching both success and failure at first hand.

Kosovo is a province where corruption is still rampant, unemployment is well over 40% and one which is still largely dependent on a huge per capita inflow of foreign money in the form of aid, remittances and expenditure by international agencies such as the United Nations, the European Union and Nato. Nearly half of its 2m inhabitants still live in a state of poverty, according to the World Bank, and Kosovo seems certain to face a mighty challenge in learning to stand on its own feet economically.

It is still largely an agricultural country, with per capita income of an estimated Euros 1,118 per annum in 2006, according to the World Bank.

Nevertheless hefty growth in construction and infrastructure, the likelihood of energy self-sufficiency within a decade and the possibility of reviving a once vibrant mining industry, all offer hope that with the right policy decisions - notably in education, the legal framework and rules governing foreign investment - Kosovo may be able to make economic sense of its historic opportunity to go it alone.

No doubt much will depend on whether Kosovar Albanians and Kosovar Serbs can get along and whether there is continuing political discontent and disruption, either from within or without the country. Vital too will be the extent of Pristina’s commitment to maintaining good relations with Serbia and the avoidance of any dalliance with the concept of a greater Albania.

But there are some signs Kosovars may be up to the challenge. There is a growing number of competent, Western-oriented, politicians and bureaucrats in Pristina who are pragmatic and seem determined to use the new European Union advisory system - due to take over from the United Nations over the next three months - to clamp down on corruption and who are keen to follow policies likely to attract a greater inflow of foreign investment.

At the grassroots level too there are signs of hope. Amid the temporary mayhem in Belgrade last week when rioters set fire to the US embassy and the talk was mainly of more political and ethnic violence to come within the world’s newest nation, no-one seems to have noticed the remarkable return to Kosovo, after nine years of exile, of two ethnic-Serbian women.

Like most Kosovar Serbs they were deeply unhappy about the former Serbian province’s declaration of independence on February 17, but they felt confident enough earlier this month to make the journey back to the once ethnically-mixed town of Decan in western Kosovo to reclaim their apartment and restart their lives in the place from which they fled in 1999 during the civil war.

“We don’t care about politics. All we want is a nice place to live and good job, and that’s why we have come back,” says Vesna Ilic, 38, whose husband was born in Decan and whose family she has left behind in Belgrade until she is confident that it will make sense for them to return.

In 1999 there were around 2,000 Serbs living in Decan, home to one of the most famous of all Christian orthodox Serb monasteries, but in the civil war that followed Slobodan Milosevic’s repression in the province and the subsequent intervention of Nato troops, around 40 or so Decani Serbs were killed, and almost all the rest – with the exception of the monks – fled to Serbia. Vesna, a big brassy blonde with a driving eye for the main chance, and her friend Milenka Popovic, 54, who was born in Decan, are the first Serbs to return to the town.

Says Vesna: “I welcome the setting up of the department of minorities. Tell prime-minister Thachi to come and meet us here and we will tell him what we need”. Whether they are the first of many will depend not just on politics, and the continued presence of Nato troops, but on economics. “We are brave, not mad!” says Malenka, sipping a glass of raki, the local firewater made with plums, with me in her old apartment. “We are all human beings. We need to work together, to find a balance together. But if we don’t find jobs we will not be able to stay”.

Few doubt that jobs and the economy are the key to Kosovo’s future. Albin Kurti, leader of the opposition Vetevendosi movement, claims that Kosovo has become dangerously over-dependent on foreign aid and expenditure and will never be a success until Kosovo is run solely by Kosovans. He dismisses the switch from UN control to an EU advisory operation as an international sleight-of-hand, which will still leave real control of Kosovo in western hands.

Since the UN took the province over in 1999 western donors have poured over US dollars 2.6bn of aid into the country. Coupled with other foreign outlays associated with the once- 6,000 strong foreign bureaucracy and the continuing placement of over 16,000 Nato troops inside the country, actual inflows have far exceeded this total.

Mr Kurti says the construction boom is often a charade with half-finished houses throughout the land and he points to the dozens of exotic restaurants and foreign services in Pristina, largely aimed at the overseas community, as symptomatic of the “lopside development” that has taken place in this largely agricultural country. “We need these bureaucrats to leave so that we can really stand on our own feet,” Mr Kurti says.

In an exclusive interview Joachim Ruecker, the German special representative of the United Nations Secretary General in Kosovo and the man who has effectively run the province for the last two years, rejects these views.

He admits the UN could have done more to encourage economic independence, but says he is confident that a free Kosovo will come up with a “sustainable growth path,” with the advice and help of the EU and UN, based on the comparative advantages of energy self-sufficiency and a fresh exploitation of its array of mineral reserves through modernisation of its mining industry. “There are comparative advantages – the glass is half full, not half empty. We have growth. Exports are rising faster than imports and there is a young and eager workforce,” he says.

According to the World Bank economic growth in 2007 is projected to have been 3.5%, up from an estimated 3.1% in 2006.

Renzo Daviddi, head of the European Commission liaison office and someone who understands the Kosovan economy better than most, admits that the billions of Euros spent since 1999 by the international community in Kosovo may have sometimes had a distorting effect in a country with such a small population. But overall he is convinced that the construction and infrastructure boom fostered by these inflows of money and the creation of a more competent workforce was vital to the province’s recovery from civil war and is still having a largely positive effect.

During the last nine years much of Kosovo’s basic infrastructure, which was destroyed in the conflict, has been restored. Over 50,000 houses have been rebuilt, providing homes to about 300,000 people, and 1,400 km of roads have been rehabilitated.

Mr Daviddi is less certain about the efficacy of the country’s big new power plant, given the costs associated with pollution under the Kyoto protocol.

The World Bank however disagrees, for it is promoting the construction of this 2,100 MW lignite power plant at a cost of Euros 14bn. It believes the new plant, due to come on stream in 2014, could turn the energy sector into an engine of growth. With the right foreign investment, the Bank argues that the country’s mining and energy sectors (Kosovo has abundant resources of lignite, lead, zinc, ferronickel, magnesite, and crushed stone, as well as relatively low transportation costs to west European markets) will be “key sources of future growth”.

However Mr Daviddi does believe that in the future regional tourism could make a sizeable impact on the economy. The country has two dramatic mountain ranges and there is the possibility of developing a vibrant ski industry. Though 90% of Kosovars are Muslim Albanians the country is home to around 150 monasteries and churches, some of them the most holy of places to orthodox Serbs.

Vesna and Milenka, the brave Serb returnees, would very much like to agree, for when I first met them they were lunching with the Serb orthodox monks at the famous Decani monastery, just a few kilometres from their homes. Beautifully restored over the last few years, with its stunning icons and 13th century wall-paintings, this enchanting cathedral amid the winter snows is a repository of world-famous Christian Byzantine art. These two women in search of jobs and a new life undoubtedly have the talent and the drive to make a go of a new religious tourist industry, should wisdom prevail in the corridors of power in Belgrade and Pristina and beyond.

© Richard Cowper: foreign policy expert, who worked for the Financial Times of London